Human and Social Capital Complementarities in the Presence of Credit Market Imperfections

Abstract

This paper models the individual-level social capital effect the credit market constraints that reduce the accumulation of costly human capital. Human capital, in turn, improves an individual’s income as well as the bequest that they intend to leave for their children. It also helps reduce inequality across a country. Finally, the model shows that investment in social capital has a negative relationship with the interest rate,so that the initial inherited bequest of every individual affects the output and investment in the short-run, as well as in the long-run.